Bank of Scotland v Alfred Truman (A Firm)
| Jurisdiction | England & Wales |
| Judgment Date | 17 March 2005 |
| Neutral Citation | [2005] EWHC 583 (QB) |
| Docket Number | Claim No: HQ04X00037 |
| Court | Queen's Bench Division |
| Date | 17 March 2005 |
[2005] EWHC 583 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
His Honour Judge Iain Hughes QC
Sitting as a Judge of the High Court
Claim No: HQ04X00037
I direct that pursuant to CPR PD 39A Para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
Introduction
The defendant is a small firm of solicitors ("the firm"). On 29 September 2000 they entered into a merchant services agreement ("the merchant services agreement") with the claimant bank ("the bank") to enable the firm to accept payment by way of credit or payment card (Visa and MasterCard) for the services which it supplied. This action is for the repayment of money paid by the bank to the firm under the merchant services agreement in respect of a series of 11 similar transactions which were connected with contracts for the importation and supply of cars to card holders by a company called Topaz Ltd ("Topaz") run by a Mr. David Jones. The nature of the transactions and the involvement of Topkarz was unknown to the bank at the time the payments were processed and the monies paid to the firm. The e11 card holders involved in the transactions which make up this claim did not receive their cars, Topkarz is insolvent and Mr Jones apparently now has a job at his local Sainsbury's.
The card holders made claims under section 75 of the Consumer Credit Act 1974 ("the 1974 Act") against their respective card issuers for the reimbursement of the payments which they made on their cards to the firm. The card issuers duly repaid their card holders then recouped these sums from the bank by means of a procedure known as chargeback. The bank now seeks repayment of those sums from the firm under the merchant services agreement.
I had the benefit of careful submissions and detailed skeleton arguments from counsel who appeared in the case: Mr David Reade for the claimant and Mr Neil Hext for the defendant. I acknowledge the thoroughness of their written and oral submissions.
One consequence of the various points identified by Mr Hext in his arguments is that there are 11 effective issues that I must decide. The value of this claim has turned out to be £28,310 rather than the £100,000 that was first feared when the claims from the first card holders were presented. Fewer card holders made claims than at first seemed likely. As the trial progressed I became concerned at the lack of proportion between the sums at stake and the time that was being spent on the trial. The trial occupied four court days and I was obliged to reserve this judgment. I enquired whether it might be possible to isolate certain crucial issues which could then determine the case. I had in mind the issues of whether or not the firm acted as stakeholder and whether or not the bank were entitled to rely on the terms of the merchant services agreement. However, both counsel told me that in view of the nature and extent of the various points under the 1974 Act taken by the firm, such a course would not be prudent. I have, however, thought it appropriate to consider certain issues in more detail than others. If either party feels that they require further specific rulings then I will prepare a supplementary judgment.
The chargeback process
When a card holder pays a merchant for goods or services or facilities with a credit card the merchant acquirer makes payment to the nominated bank account of the merchant in the amount of the payment they have accepted by card. This payment is made by the merchant acquirer upon the merchant submitting data in respect of the transaction, usually by the electronic transmission of the data. Such payments are made by the merchant acquirer very quickly, usually within a few days.
The bank as a merchant acquirer is a member of the card schemes operated by MasterCard and Visa. Having received data from a merchant the merchant acquirer will submit the electronic data in respect of the transaction to the clearing system of the relevant card scheme. Each of the card schemes operate a card clearing system to facilitate the payment and interchange of liabilities between the card issuers and the merchant acquirer. Having submitted the data the card issuer pays the amount of the transaction to the merchant acquirer. The card issuer then seeks payment from its card holder. A helpful chart illustrating this process is at page B 1/285.
The clearing process involves a very large number of transactions; the evidence was something in the order of 5.2 billion each year. Neither the merchant acquirer nor the card issuer have any involvement with the underlying transaction between the card holder and the merchant and are not in a position to resolve disputes between them. Because of this the schemes operate a chargeback mechanism for swiftly dealing with disputes between the card holder and the merchant. The European Chargeback Guide is at pages 843–93.
Chargeback may occur, for example, when a card holder asserts that he has not received the goods or services for which he has paid with his card or he finds a transaction on his monthly statement which he did not authorise. By this time the merchant will have been paid by the merchant acquirer in respect of the transaction.
If the card holder raises such a claim with their card issuer the latter will then chargeback the transaction to the merchant acquirer, in so doing identifying the basis of the dispute. Codes are used to identify the nature of the claim. The merchant acquirer will then refund the card issuer. The merchant acquirer will then pass the chargeback on to the merchant. In so doing they will seek information relating to the transaction. In the case of alleged non receipt of goods the merchant acquirer will ask for evidence of any delivery. If the merchant is able to provide this evidence then the merchant acquirer will re-present the transaction and it will be debited again from the card issuer back to the merchant acquirer.
In the event that the card issuer still does not accept this re-presentation it may again chargeback and this will again require the merchant acquirer to credit the sum back to the card issuer. This chargeback cannot be re-presented again. There is an arbitration scheme between the card issuers and the merchant acquirers which incurs fees. The critical aspect of the defence to the original chargeback depends upon their being evidence from the merchant to defend the chargeback. The chart at page B 1/285, as modified during the hearing, also illustrates the operation of the chargeback.
In the present case the chargeback system required the bank to refund the card issuer and debit the account of the firm for the sums claimed by the card holders. The absence of any evidence from the firm proving delivery of the motor cars led to the decision by the bank not to re-present the transactions. In the event because the relationship between the bank and the firm had come to an end there were no payments due to the firm against which the chargeback debits could be set. Accordingly the bank commenced this action to recover its loss.
The oral evidence
The bank called oral evidence from a number of witnesses. Miss Fiona Ritchie (page 228), a business development manager with the bank, was responsible for setting up the merchant services agreement. Miss Ritchie told me that when the agreement had been negotiated it had not been anticipated that the firm would become involved in the business of importing motor cars from abroad.
Mr Terence Newman is the UK Merchant Operations director at First Data International, a company that provides the bank with processing and settlement services relating to credit/debit card transactions. Mr Newman provided detailed background information about the working of the chargeback procedures (page 234).
Miss Susan Higgins, an assistant project manager, was for some years responsible for the relationship between the bank and the firm (page 245C). Although Miss Higgins was not directly involved in the chargeback procedures used in the 10 transactions, she was able to explain the documents generated by the process.
Finally, the bank called Miss Kerry Avis, a collections manager at First Data International (page 220). Miss Avis was involved in the material chargebacks and explained what had happened and why the decision had been taken that the chargebacks could not be defended and would have to be passed on to the firm. This was after the firm had started to argue that the material transactions were stakeholder services rather than the supply of motor cars. Miss Avis told me:
"By 22 April 2003 we had decided that we could not defend the chargebacks. My senior manager, Catherine Jay and I looked at all of the facts. We obtained advice over the telephone from Barclays chargebacks and from our own chargeback people. We could not defend the chargebacks because the card holders were saying that the transaction was for the deposit for a car. The disputed transaction was that they had not received their car. After taking all this advice there was no reason open to us that would have allowed us to defend the chargeback."
None of the evidence called by the bank was seriously challenged by Mr Hext. It was in the nature of educative rather than contentious evidence. The witnesses struck me as being both conscientious and careful and I have no hesitation in accepting their evidence.
Mr Hext called one witness, Mr Roger Shipway, the accounts manager of the firm (page 246). Mr Shipway has not enjoyed good health in recent years and I make proper allowance for that fact. The business of processing credit card...
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